Rescission remedy cases aren’t a slam dunk

Franchise Focus: Recission remedy cases aren't a slam dunk

One of the statutory remedies available to franchisees in Ontario, Alberta, P.E.I., New Brunswick and Manitoba is the rescission remedy, which is used when a franchisor fails to deliver a proper disclosure document. If a franchisee rescinds on time and the court finds that the franchisor has not complied with its statutory disclosure obligation, then the franchisor will be ordered to refund any money received from the franchisee, purchase inventory, supplies and equipment from that person, and compensate for any losses incurred in acquiring, setting up and operating the franchise. Depending on how long the franchise was operated before rescission, and the extent of the franchisee’s losses, a franchisor may be required to pay a significant amount of money to the franchisee.

For more technical deficiencies, a franchisee has 60 days from the date it received the disclosure document to rescind. Where no disclosure document was provided or the document was materially deficient because, for example, it was missing a signed certificate, contained no financials or didn’t include a copy of the lease, the franchisee has two years from the date it signed the agreement to rescind.

Just because there are limited defences available to a franchisor on a rescission claim, doesn’t mean a court is going to find quickly in favour of a franchisee. A franchisee still has to establish that a disclosure document was required in the first place and prove either that it never got one or that the one it got was deficient. If there are facts in dispute surrounding whether and when a disclosure document was received and what that disclosure document contained, it will likely require a trial where a court can hear live testimony and assess the credibility of the parties. Depending on the case, it may take a couple of years to get to trial.

In the recent rescission case, 219338 Ontario Ltd. v Grill It Up!, 2012 ONSC 6621 (available at http://canlii.ca/t/ftvpf), the franchisees, who had commenced an Ontario proceeding against the franchisor by application instead of action, claimed, among other things, that disclosure had never been made and that they were entitled to rescind franchise agreements for two Ontario and one Alberta locations. The franchisor, on the other hand, submitted that disclosure had been made and relied on acknowledgments signed by the franchisees.

On an application, a court can only decide the issues before it based on affidavit evidence and transcripts of cr0ss-examinations. Unlike actions that are ultimately decided by trials, there is no live testimony. For this reason and because there’s no discovery on an application, they are much faster and less expensive than actions

In this case, Justice Quigley determined it was not appropriate to decide by application whether disclosure was made and if so when. Although the franchisor’s evidence was that it had provided the franchisee with a disclosure document, the franchisor had refused to produce documentation of that disclosure. The franchisee claimed this undermined the franchisor’s credibility, or at least gave rise to a negative inference. The franchisee, however, also had a credibility issue. It admitted it had signed acknowledgment documents on three separate occasions (one for each location) but claimed it hadn’t actually received disclosure.

Against this background, the court outlined several evidentiary conflicts and suspicious conduct presented by the case that would need to be resolved at trial, and ordered that the application proceed to trial and be treated as an action. At trial, a judge would be in a better position to decide the matter after receiving live evidence and following cross-examinations. Further, until the issues as to whether disclosure had been made and if so when, the Court couldn’t decide other questions, including whether the disclosure was adequate or what quantum of damages arose from the alleged failure to disclose.

What happens next in this proceeding will depend on what documentation the franchisor produces. Justice Quigley ordered the franchisor to produce the documentation it had been refusing to produce within 30 days. If the franchisor fails to comply, then Justice Quigley will permit the franchisee to bring a motion to strike the franchisor’s defending documentation. The franchisor will have a hard time defending the franchisee’s claims if it cannot rely on any documentation.

To avoid a dispute over whether disclosure was made, franchisors should be able to produce not only the franchisee’s signed acknowledgment but a copy of what was actually disclosed, including all attachments and schedules. As for franchisees, if they didn’t receive a disclosure document, they shouldn’t be signing an acknowledgement they did.